Important lessons from Europe as companies attempt to understand carbon management along the extended enterprise
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The almost invariably gray skies independent of season in London, England, give visitors to the old city an eerily Dickensian impression that the best of times may have already passed. But in terms of the green supply chain, London–and Europe for that matter–cannot be accused of living in the past tense, or in any way lagging behind other geographies.
One can learn a great deal by examining the extent to which Europeans have pushed ahead their green agenda in response to both more extensive regulatory and market forces pressures, and the recognition that “green strategies are great strategies.” They are great for business, customers, stakeholders, employees and all supply-chain partners, and apparently great for the planet, too.
European corporations are also making preparations for full integration of even broader aspects of carbon in addition to other environmental issues, since commercial internalities present various opportunities in cost savings, innovation and competitive advantage over time scales into the future.
Case Studies
European business is investing in green. Retailer Marks and Spencer (M&S), for example, plans to invest up to $400 million over a five-year period. After its first year, energy savings alone suggest its “Plan A” corporate social responsibility (CSR) program has become cost neutral. Longer-term benefits beyond simple energy savings are somewhat harder to quantify. Quantified or not, M&S has used the opportunity to share information, learning, rewards and awards with a wide range of collaborative supply-chain partners and stakeholders.
Companies are moving the emissions/energy-efficiency agenda out of the ENERGY STAR-rated box, through to the energy-efficient data center and beyond.
Does this mean U.S. corporations are environmental Ebenezer Scrooges? Such a label would be unfair, as some could teach Europeans a thing or two about energy efficiency, innovation, product design strategies, disassembly or about the environment generally. Dell recently announced it achieved carbon neutrality in its global operations. IBM and HP are releasing wide-ranging strategies to drive energy savings and emission reductions that look forward over multi-decade time scales and project emissions reductions on the order of billions of avoided tons of CO2. Such companies are moving the emissions/energy-efficiency agenda out of the ENERGY STAR®-rated box, through to the energy-efficient data center and beyond into fully engaging, intelligent IT solutions for the global challenge of climate change.
But there is much more that can be done. Setting vanguard companies or initiatives aside, the U.S. market has been slow to adapt to “decarbonization” and is significantly lagging behind the evolution and maturity of European green strategies. Even though highly ranked on the more economically and socially focused Dow Jones Sustainability Index, Proctor and Gamble (P&G) recently earmarked $5 million for energy-savings projects, along with a proposed 10 percent reduction in overall environmental footprint within the next four years. Impressive, but small in comparison to M&S.
Ranked second behind P&G in global sales, U.K.-based Unilever offers a different scale of engagement. With $1.3 billion invested in research and development, $140 million invested in communities and even greater amounts invested in packaging technology, its commitment to fully engaging sustainability, emissions reductions and energy efficiency as a central tenet are simply on a different level. Its four-year energy reduction target is 25 percent and the approach has been to engage the entire supply chain. But who is making the most money? That answer requires evaluation beyond quarterly returns and should incorporate long-term reputation, market share, brand protection and development, along with avoidable future implementation costs.
How and when will the wider U.S. market recognize the epiphany of carbon and energy efficiency, and sustainability-based competition? Will the United States be haunted by the future challenges of delayed actions that could have already been implemented? We think this process has already begun.
There are three interconnected time frames and themes within which carbon is being internalized in Europe (Figure 1). Understanding this evolution is the starting point for addressing the gap.
Ghosts of Carbon Past
Unlike the United States, the collation and reporting of greenhouse gas (GHG) emissions footprints in Europe is clearly a given. This was largely initiated and now driven by the Carbon Disclosure Project (CDP), which reports on more than 3,000 organizations and represents investor assets exceeding $57 trillion. The notion of a carbon footprint is front and center, and is part of the daily vocabulary of the marketplace. Consumers understand it and, compared to coverage in the United States, the popular media report on it increasingly more frequently.
While consumers are aware and inclined to agree with the green product proposition, selling it is more difficult. In the most recent survey of U.K. customers conducted in 2008, 60 percent believed sustainability issues were the most important issues facing the world, while 80 percent claimed to be worried about climate change.
There are also signs of changes in purchasing patterns. Organic food sales have grown from 22 percent to 43 percent. While increasing by almost a percentage point over the past five years, the overall share of ethical and environmentally friendly products remains small at 4 percent. Part of the reason for the increase is related to the price. In the long term, an economic case could be made that mainstream green goods should actually command a price discount, due to the attendant production efficiency.
Although U.S. corporations are increasingly engaged in reporting carbon emissions and other environmental data, unlike Europeans, they still display a widespread reluctance to report. We hear suggestions that too much confusion exists to report fully or accurately, organizational and operational reporting boundaries are too complicated, and delays are occurring due to a lack of a single universally accepted reporting protocol.
Such procrastination is not given credence in Europe. According to Nigel Topping of the CDP, the expectations for an organization to show pragmatic green leadership are plain: Take an intelligent view of where boundaries are and get on with reporting transparently. If the basis of your reporting decisions requires subsequent re-analysis or adjustment, nobody will get on your case.
That said, European corporations, along with their U.S. counterparts, remain relatively poorly served by software and service solutions in the carbon-management space, something we at AMR are currently examining in some detail. Even some of the largest organizations are undertaking footprinting and reporting via risk-intensive, custom-made and homemade solutions based on spreadsheets and other potentially volatile data archives. Not only do such approaches increase risk, they also render emission-based process optimization exercises at best manual and disconnected, and at worst highly non-optimal.
Globalization of the New Carbon Consciousness
Whether due to a more generally environmentally conscious customer base, widely established legislation or the ubiquitous European nation state Kyoto Protocol ratification, the European market is significantly advanced in respect to its carbon knowledge, reduction and reporting. Environmental tariffs based around carbon are already informally established in Europe via stated retail supplier entry requirements. These are for the most part within the strategic pipeline, rather than in the streets and stores of Europe today.
European corporations, along with their U.S. counterparts, remain relatively poorly served by software and service solutions in the
Early movement will provide both advantage and leadership status. Corporations based primarily in other geographies can gain significant insights and fast tracking of their initiatives by developing thorough insights into the European carbon experience. Where is your organization in this era of de-carbonization? Could you offer up a best estimate of the embodied carbon in your products or services?
Have you considered that order winning might in the future be predicated on the total carbon you can account for within your products, even if the majority of that carbon is derived from sources elsewhere within your supply chain? And have you started a dialogue with suppliers to quantify and reduce their carbon footprint? If not, it is time to start thinking and asking, because unlike Charles Dickens’ “Oliver Twist,” when it comes to carbon, the European marketplace is screaming out for less!
The Ghost of Carbon Present
At least in Europe, the debate over organizational, operational GHG measurement and reporting is over; it is now simply part of standard compliance reporting. This has shifted to a holistic view of carbon and energy throughout the supply chain. It is here the perfect storm of enterprise sustainability is located, with customer-facing business viewing emission reporting and reduction pressures as being naturally connected with energy efficiency and continuous improvement. That link has been amplified in light of the current energy cost crisis.
Differentiation of upstream and downstream carbon-intensive supply chains is highly relevant. In the high-tech vertical, customer usage-based product energy demands can represent up to 60 percent of the full cost of the product over its life cycle. Small wins in terms of product energy efficiency can make significant differences to overall supply-chain energy consumption and customer value.
Manufacturers are increasingly taking ownership of the importance of energy efficiency and communicating this to customers, while customers continue to make most purchasing decisions based solely on price.
GPG manufacturers are learning tough lessons about the extent to which supply chains anchored in agricultural practices impact overall supply-chain performance. Agriculture is typically carbon, water and chemical intensive. Until recently, manufacturers have had little knowledge or ability to drive agricultural supplier operational practices.
The CDP is again playing a leading role in the quantification of supply-chain carbon. Having formed the CDP Supply Chain Leadership Collaboration (SCLC) in October 2007 with the goal of developing standardized methodologies for reporting carbon emissions, risks, opportunities and strategies, its first report was published in May 2008.
The manner of response to opportunities now presented by the low-carbon agenda indicate effort and a considerable potential for a greater degree of business-wide emission reduction (Figure 3). The majority of effort is focused on energy cost reduction and energy efficiency. Packaging and logistics solutions are surprisingly underrepresented within current mitigation strategies, as is telecommuting. Scope for future solution development and implementation is also clearly visible in current emission reduction target strategies (Figure 4). If you ask a supply-chain partner what their company is doing about carbon emission reduction, more than two-thirds will either have no answer or indicate emission reductions are a work in progress; only a quarter will have specific targets; and only 1-2 percent are reducing diesel usage, increasing renewable energy usage or targeting carbon neutrality as an outcome.
Ghost of Carbon Future
I was recently questioned by a strategist from a substantial U.S.-based software and business service provider on the realities and manifestation of carbon-based behavior change as it impacts retailers and customers. This was very much in mind when observing retail outlets. As in retail chain-coordinated green marketing, the green message is now stamped on individual products.
I sent the strategist in question a packet of carbon-labeled Walkers Potato Chips. Prominently displayed on both front and rear is a summary of the embodied carbon within the product, which at 107g is more than twice the actual weight of the potato chips! The Walker brand parent company, PepsiCo UK, provides a five-stage breakdown of the points at which carbon is introduced and embedded into its potato chips. Of the 107g of carbon within the given product, less than 50 percent is under the direct control of PepsiCo, with the balance relatable to agricultural activities associated with potato production and preparation. The study was achieved in collaboration with the Carbon Trust as one of two pilot programs operating over the past five years.
PepsiCo UK has enjoyed widespread recognition for undertaking the first published full product emission life-cycle measurement and for its labeling of Walkers Potato Chips. The study identified easy immediate reductions in overall supply-chain emissions of 8 percent (18,000 tons of CO2 annually), with further significant reductions in embodied carbon levels already possible and planned, simply by embracing existing best production technologies and practices.
Future carbon disclosure may be required at the granulated and public SKU level. This is based on pull factors from retailers, but should also reflect future customer demand. For the increasing number of the highly engaged, a new currency of “environmental calories” is suggested. Given the U.K. carbon emissions targets of 8.3 tons of CO2 emissions per person per day, an average consumer should consume about 2.9kg of embodied food and beverage carbon daily.
This is unlikely to be palatable for many, but both customers and retailers are likely to make purchase and shelf-space decisions based on embodied carbon budgets. In the future, absence of a green price premium on this level may be detrimental for goods to compete. U.K. retailer TESCO is leading the charge in what CEO Sir Terry Leahy describes as “delivering green consumption.”
TESCO’s action plan includes: halving in-store and distribution center energy use by 2020; doubling customer bag recycling in 2008; placing an airplane logo on all air-freighted goods; maintaining air-freighted goods in stores at levels below one percent of total SKUs; providing a carbon label on its 7,000 brand products; and making a $10 million investment in research and development with the Carbon Trust and Oxford University’s Environmental Change Institute to develop a universally applicable carbon label.
At a conservatively estimated $12,000 per SKU, and given the typical 20,000-25,000 SKUs in a retail-chain inventory, this represents an important and ongoing future exercise, with initial investments on the order of $400 million to generate an initial database.
In the future, suppliers may be required to produce an embodied product or raw material carbon inventory along with actual products, as well as set out long-term carbon-reduction policies as part of business as usual. Moreover, carbon intensity, due to its impact on overall supply chain and overall product-embodied carbon, might well become a major basis for supplier competition.
